Colorless Kodak

W hat will it take to light up
Eastman Kodak
's dimly performing stock? Something with the photo flash speed desired by Wall Streeters would be welcome, but seems unlikely. Many money managers and analysts are still waiting for the revitalization that CEO George Fisher promised after he arrived in 1993, and remains as far away now as it did when Barron's wrote a favorable article last summer on the company's prospects ("Kodak's New Colors ," August 24).

But bulls on the company remain scarce. Particularly unsettling to them has been the sluggishness of Kodak's earnings on the film side, its main business. Typical of recent reaction perhaps was the ho-hum way that Wall Street responded this past week to Kodak's announced plan to sell its poorly performing office-copier manufacturing operations to the German printing equipment maker,
Heidelberger Druckmaschinen
. The generally accepted view was that the sale was necessary to get another load off Kodak's back, but did little to bolster the underlying need for profitable growth in the film business, long the company's mainstay.

In Big Board trading, the stock rose modestly this past week after the Heidelberger news broke, and closed Friday at 66 3/4, up from 66 5/16 a week earlier. The stock is a noticeable laggard, trading below the 1998 year-end close of 72, which represented a gain of nearly 19% for the year, and way below its 1998 high of 88 15/16. In contrast, major market averages are up this year, with the Dow Jones Industrials, of which Kodak is a component, climbing more than 8% (see chart). Based on its price-to-earnings ratio, it trades at about half the multiple of the S&P 500.

"The stock is so damned cheap," blurts Nancy Tengler, portfolio manager at Global Alliance Value Investors, when we caught up with her as she was boarding a London-bound plane. "Even if the stock rose 10 points, it would still be a buy."

Tengler, no stranger to Barron's, has owned Kodak for some time, but is frustrated by its comparatively weak showing of late. "The stock needs a catalyst to get it moving again. I'm not sure what it is, but it will likely be tied to the film business."

Equally frustrated is another money manager who likes the company -- David Williams, manager of the
Excelsior Value & Restructuring
fund. Last August, when the stock was 84, he said it was headed above 100. Well, it has quite a way to go, and Williams reckons that investors might have to be patient to see any real rise in the stock, of which he still has sizable holdings.

"What Kodak really needs, I think, is a good quarter," Williams declares. He would like to see a stronger profit trend, without the problems of one kind or another that have tripped up the company. And a good quarter, he feels, will depend on solid evidence that the film business is on the mend, with prices improving. A stronger Japanese yen would help, in light of stiffer competition from Fuji as it has stepped up its presence in the U.S. A weakening yen favored Fuji in a price war that it launched two years ago. Williams suspects that prices have stabilized, at least temporarily.

Somewhat surprisingly, Kodak's sluggish stock performance comes in the face of mostly upbeat earnings forecasts. The consensus of estimates, as logged by First Call, runs to 83 cents a share for the first quarter, up from 69 cents a year earlier. The consensus is $5.01 for all of 1999, versus $4.37 in 1998, and for $5.65 in 2000.

-- Harlan S. Byrne

Standstill

Fleet-BankBoston merger should slow consolidation

F leet Financial Group got an extremely good deal in paying only $53 a share, or $16 billion, in a stock swap to buy regional rival
BankBoston
. Despite the 13% premium attached to the deal, the price was still well below BankBoston's 52-week high of 59 1/16, hit in July.

In more normal times, banking analysts estimate that BankBoston could have fetched $65. But its heavy exposure to troubled Latin America and an ill-timed, if strategically smart, purchase of the Robertson Stephens investment banking boutique last summer weighed on its share price. BankBoston also had trouble boosting returns in its retail banking business, botching the integration of its prized BayBanks acquisition.

As for BankBoston shareholders, they get a less volatile stock in a company with a strong earnings profile going forward. And those Barron's readers who took our advice ("Promise and Peril ," November 17, 1997) and bet that the Latin-American drag on BankBoston would make it vulnerable to a takeover have done okay: The takeout price represents a 30% premium to the split-adjusted 40 27/32 level where we suggested the shares might be worth a look.

The really big winners may be community banks like
Peoples Heritage Financial Group
,
Webster Financial
,
Royal Bank of Scotland
's Citizens Financial Group and Peoples Bank, which all stand to gain a share of the $13 billion in deposits the new Fleet Boston will have to auction off in Rhode Island, Massachusetts and Connecticut to pass regulatory muster. On a standalone basis, just the divestiture would be equal to the second-biggest independent bank in the region.

Consolidation in the region will likely be dead until well into the year 2000 as these smaller banks focus their resources on the available assets and then will have to digest them.

"This pushes back the time frame for an acquisition of Fleet," says Rob Arnold of Delaware Investments. "Ultimately, though, it will continue to participate in consolidation." Nor is this likely to set off another round of consolidation in the industry, since many would-be acquirers such as
BankAmerica
,
Bank One
and
Wells Fargo
are struggling to integrate major mergers from last year. Says Bush: "There's no sense that this is going to lead to the next wave."

-- Sandra Ward

Sturm & Schroeder

Disputes and economy plague Germany's leader

S ix months after Germany's new socialist chancellor, Gerhard Schroeder, ousted long time leader Helmut Kohl, he has ousted his main rival within his SPD party: Finance Minister Oskar Lafontaine, a left-wing firebrand. But the current "red-green" coalition government shared by the SPD and Green parties looks just as troubled as ever.

Lafontaine resigned recently under pressure from the party's pro-business, reformist wing, led by Schroeder, after bitter policy disputes. At the heart of the conflicts: how to revive Germany's flagging economy and spur growth. Lafontaine advocated a cut in personal income tax rates, to be funded by closing loopholes in the corporate tax structure. Schroeder wants a more business-friendly environment and warns that higher taxes on companies would force German industrialists to move plants abroad.

Lafontaine also alarmed business leaders and investors with his frequent calls for the Bundesbank and later the European Central Bank to cut interest rates in order to aid the German economy. His attempts to undercut the banks' authority are widely seen as a key reason for the euro's nearly 10% drop against the dollar since the new European currency's inception January 1.

Publicly, German business leaders reacted to Lafontaine's departure with subdued optimism, happy that the SPD's pro-business wing has prevailed but concerned about further political uncertainty. Lafontaine's successor, Hans Eichel, who is to take office April 7, inspires little enthusiasm. Many Germans seem to feel that their country is continuing to drift, bereft of strong leadership or vision. Public concern has turned to alarm in recent months as unemployment, which peaked at around 11% but had declined through most of 1998, is rising again. Economists recently have revised their 1999 growth estimates to a range of 1.8%-2.2% from earlier forecasts as high as 2.8%.

No sooner had Lafontaine departed than critics on both the left and right took fresh aim at Germany's beleaguered chancellor. Left-wing SPD members have called for the resignation of Bodo Hombach, Schroeder's most trusted aide. And Manfred Gentz,
DaimlerChrysler
's CFO, implied in a letter to a Stuttgart newspaper that the company might move some of its operations to the U.S. if the German business climate doesn't improve.

Schroeder's still under fire: On Friday, the German parliament passed a bill drafted by Lafontaine, which cuts family taxes, introduces an energy tax and requires employers to make retirement contributions for part-time workers.

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